Breaking the cycle: Perspectives on tax and levy hikes amid Nigeria’s economic challenges

Introduction

Nigeria’s economy has been in turmoil, grappling with inflation, currency devaluation, and fluctuating oil prices. Since President Bola Ahmed Tinubu took office in May 2023, the government has introduced a series of policy changes to boost revenue. Among the most controversial are tax and levy hikes across multiple sectors. These measures, aimed at stabilising the economy, have instead exacerbated financial struggles for businesses and citizens.

This article explores the reasons behind these hikes, their impact on Nigerians, and potential solutions to mitigate economic hardship.

Why the increase in taxes, levies, and fees?

The government justifies these fiscal measures as necessary for revenue generation and economic diversification. With dwindling oil revenues, increasing taxes was deemed a quick fix to address budget deficits. The primary motivations include:

1. Revenue generation: Higher taxes and levies are expected to fill the financial gap caused by declining oil earnings.

2. Economic reforms: Reducing dependence on oil, though necessary, has led to hasty reforms without mitigating short-term consequences.

While the goal is long-term fiscal sustainability, these measures have pushed many Nigerians deeper into poverty.

List of levies and taxes in the past 20 months

1. Fuel subsidy removal

The removal of the fuel subsidy in 2023 caused fuel prices to soar from N185 to over N1,000 per litre. This led to skyrocketing transportation costs, inflation, and a lower standard of living.

2. VAT Increase

VAT was raised from 7.5 percent to 10 percent, significantly affecting the prices of goods and services, disproportionately impacting low- and middle-income earners.

3. Multiple bank charges

· Cash Handling Charges (COT): Reintroduced by the Central Bank of Nigeria (CBN) in 2023, imposing fees on withdrawals and deposits above N500,000.

· ATM withdrawal fees: N35 per withdrawal beyond the third transaction monthly. Recently, withdrawals from ATMs outside bank premises now attract a ₦100 fee per ₦20,000 withdrawn.

· Transaction charges: N50 deduction on each money transfer, reducing the exact value received by beneficiaries.

4. Telecommunications Service Fees

A 10 percent increase in data tariffs and higher costs for off-net calls have made communication more expensive.

5. Customs and port fees

Port handling charges, including customs clearance and storage fees, rose by over 25 percent, increasing the cost of imported goods.

6. Toll gate fees

The government plans to reintroduce toll gates, with charges as high as N500 per vehicle, further straining commuters.

7. Electricity tariffs

Tariffs have increased by more than 100 percent in Lagos and Abuja. While Band A consumers receive nearly 24-hour electricity, those in Band D get only four hours daily. The nationwide shortage of prepaid meters compounds these issues.

8. Other local levies

States have raised property taxes, road maintenance fees, and environmental levies, especially in Lagos, where living costs are already high.

The impact on consumers and businesses

According to the World Bank, these policies have pushed an additional 120-130 million Nigerians below the poverty line. The consequences are widespread:

· Transportation costs: Higher fuel prices have made commuting unaffordable for many. Public transport fares have risen sharply, forcing some to abandon work and education.

· SMEs under pressure: Small and medium-sized enterprises (SMEs) are struggling with rising costs of fuel, electricity, and raw materials. Many have shut down or laid off workers.

· Educational sector: With tuition fees rising while incomes stagnate, many parents can no longer afford quality education for their children.

· Healthcare: Rising costs of medical supplies and services mean fewer Nigerians can access basic healthcare.

· Housing: The cost of building materials has increased, making home ownership and rental housing more expensive.

Multinational companies have also been leaving Nigeria due to these economic difficulties, reducing investment and job opportunities.

What the government should do

1. Increase Subsidies for Critical Sectors: Targeted subsidies for transportation and food can help alleviate financial burdens.

2. Expand social safety nets: Cash transfers and food assistance programs should be expanded to support vulnerable populations.

3. Improve infrastructure: Reliable electricity and better transportation networks can lower the cost of living and boost business operations.

4. Support SMEs: Grants, tax breaks, and low-interest loans can help small businesses remain viable.

5. Invest in rail transport: Nigeria’s railway system remains underdeveloped. Expanding intercity rail networks can provide a more affordable transport alternative, reducing reliance on fuel and road transport.

Effective policy implementation

For taxation to be effective, the government must ensure that funds are used transparently and efficiently. Key measures include:

1. Accountability: Strict monitoring to prevent mismanagement of tax revenues.

2. Public awareness: Citizens must understand the purpose of these policies to foster trust.

3. Stronger regulations: Tax laws must be enforced fairly to ensure compliance and curb corruption.

No developing nation can tax its way to prosperity.

While taxation is essential for revenue generation, no developing country has achieved prosperity solely through heavy taxation. A strategic focus on economic growth is more effective. High import taxes, in particular, increase production costs, discourage investment, and fuel inflation. Nigeria’s economy remains import-dependent, with over 95 percent of manufacturing raw materials sourced from abroad. Imposing excessive taxes in this climate stifles industrial growth.

According to the World Bank, Nigeria’s poverty rate has surged from 40.1 percent in 2018 to 56.0 percent today, affecting 129 million people. Countries like Singapore and South Korea built prosperity by first investing in infrastructure, education, and technology before implementing structured tax systems. Nigeria must adopt a similar approach.

Taxation should follow prosperity, not precede it. Policies should encourage business growth, job creation, and foreign investment before increasing tax burdens. Otherwise, the economy risks further decline.

Conclusion

The Nigerian government’s tax hikes and fiscal policies have disproportionately affected ordinary citizens. The removal of fuel subsidies, increased VAT, higher electricity tariffs, and other levies has placed immense financial pressure on the populace. Without addressing systemic corruption, wasteful spending, and inadequate public services, these measures will only deepen economic hardship.

To foster a sustainable economy, the government must:

· Cut unnecessary government expenditures.

· Prioritise essential services like education, healthcare, and housing.

· Provide targeted subsidies and social safety nets.

· Support businesses to drive job creation and economic growth.

A balanced approach that promotes economic stability without burdening citizens is essential. Until then, excessive taxation will continue to suppress economic activity and lower the quality of life for millions of Nigerians. The government must rethink its strategy to ensure both revenue generation and economic relief for the people.

Oyewole O. Sarumi is a Professor of Strategic Leadership and Digital Transformation. He is the Executive Director, ICLED Business School, Lekki, and Faculty, Prowess University, Delaware, US. His main research interests include leadership and enterprise, strategy and digital transformation in leadership with emphasis on education, business and e-governance. You can reach him on +234 803 304 1421 Email: [email protected]